What is pre-foreclosure?
Pre-foreclosure refers to the legal situation in which a property finds itself during the early stages of repossession. Achieving pre-foreclosure status begins when the lender files a notice of default on the property, which informs the property owner that the lender will pursue foreclosure action if the debt is not paid.
The homeowner can pay off the outstanding debt at this point, he can reverse the default status by offsetting late payments so that the house is no longer in pre-foreclosure, or she can sell the property before it is foreclosed.
The pitfalls of buying a foreclosed home
How Pre-foreclosure Works
When a buyer takes out a loan to buy property, he signs a contract with the lending institution to repay the loan in monthly installments. These monthly payments cover part of the principal and interest on the mortgage. He is said to be in default if he does not make payments for at least three months. Pre-entry cannot begin before it is at least three months late.
He will receive a notice of default, which will also be made public. This action begins the pre-foreclosure process.
The pre-foreclosure period can last from three to 10 months. A public auction or a trustee sale is organized at the end of this period.
A pre-foreclosure home that is put up for sale is generally called a short sale. The sale can be a private transaction between the owner and the buyer, but the buyer’s offer must be approved by the bank before the sale can be finalized. The purchase price may be lower than the balance of the current loan, which is why the sale is said to be “short”. However, not all short sales are pre-foreclosures. Homeowners sometimes choose to sell their properties by any means possible before their defaults reach this stage.
A pre-foreclosed home can be inspected by the buyer before making an offer on the home. The buyer could be an investor seeking to buy the property at a price below its full market value, and then sell it at a higher price for a profit.
If the owner advertises the property for sale through a real estate agent, potential buyers will contact the listing agent. The lending bank must approve any short sale and will hire one or more real estate brokers to prepare a Broker Price Opinion (BPO) – an estimated market value based on an analysis of similar houses that have recently sold in the local market. The estimated market value helps the bank decide if the proposed sale price is acceptable.
Homeowners at risk of foreclosure can contact the federal Making Home Affordable program at 888-995-HOPE (888-955-4673) for help keeping their house or moving to a new house if this is not possible. .
- Pre-foreclosure begins when the lender files a notice of default on the property because the owner has been at least three months past due with the mortgage payments.
- A homeowner might have the option of selling their pre-foreclosure home as a short sale after the lender’s approval.
- If the owner does not cover the overdue payments and does not sell the house during the pre-foreclosure period, the lender will eventually sell the property, usually at auction.
Advantages and disadvantages of pre-foreclosure
A house sold during the pre-foreclosure phase can benefit the three parties involved. The owner is able to sell the property while avoiding the damage that a foreclosure would have on his credit history. The buyer may be able to acquire the property for less than the market value. The credit institution is able to efficiently transfer the mortgage to the buyer and avoid foreclosure costs.
But buyers of pre-foreclosed homes should be aware of real estate liens or unpaid taxes on these homes, as these can potentially become their responsibilities after purchasing the properties. The buyer must also consider the costs of repair and renovation if the pre-foreclosed home is in poor condition, or he may end up with expenses that exceed his budget.
If the owner does not cover the payments due and does not sell the house during the pre-foreclosure period, the lender will eventually sell the property, usually at auction. The bank owns the property at this point and is more likely to try to sell the property at an even lower price rather than maintaining current expenses, such as taxes and insurance.